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00:00We start with the Federal Reserve decision this week addressing persistent inflation, rising borrowing costs and a whole lot of
00:06uncertainty.
00:07Jason Furman is professor of economics at Harvard and served as the chair of President Obama's Council of Economic Advisors.
00:16So, Jason, we got three things out of the Federal Reserve this week.
00:19We got a decision not to do anything about rates.
00:22We got a statement that didn't change a whole lot from what it did before.
00:25And then we got a news conference from Chair Warsh. Of the three, which was the most important?
00:31The dissents were the most important.
00:34It's very clear where a lot of members of this committee want rates to go going forward.
00:41And in the news conference, certainly Chair Warsh was asked about those dissents, why they dissented, why he disagreed with
00:48them.
00:48I'm not sure we got a clear answer to that question.
00:51Do we have a sense from him, from the way he thinks about it, why he did not join with
00:55the dissents?
00:58I don't think we got a clear sense from him.
01:00I think he has two, Chair Warsh has two points, which I agree with him on.
01:04One is you want to look at financial conditions, and there's been a lot of tightening on the long end
01:09of the curve.
01:10Now, you need to be a little bit careful.
01:12Some of that is in anticipation of what the Fed is going to do.
01:15And if the Fed ends up not doing that, some of that would end up unwinding.
01:19But so far, financial conditions, at least on the rate side, have tightened.
01:24And second, this really is a different type of inflation than what we had a couple of years ago.
01:30It's not the same type of labor market tightness, high wage growth, high price growth, high inflation expectations that we
01:40saw in the past.
01:41Before we get into exactly what you think is causing the inflation, let's talk about the level of inflation itself.
01:46We're often taught the core PCE is what the Fed really pays a lot of attention to.
01:51That has been rising fairly steadily.
01:53So it does give rise to the question, which was asked, what are you waiting for?
01:59Yeah, I think that's a totally reasonable question.
02:03Inflation is intolerably high.
02:06It's been intolerably high for five straight years now.
02:11The argument on the other side in terms of what you would be waiting for, the two best arguments are,
02:17one, that rates may be set above neutral already.
02:21So there may be a little bit of a foot on the brake pedal.
02:27And yes, you could debate whether you should be pushing harder on the brake pedal, but maybe, and I think
02:32arguably and plausibly, you are on the brake pedal already.
02:36And then the second argument is the transitory one.
02:40And I don't think we're going to hear that word from any government official ever again, probably for another 50
02:46years before they get over what happened last time they used that word.
02:49But implicitly, that is what the Dove case is, at least at the moment.
02:56When it comes to the T word, whether we use the word transitory or not, how long is transitory?
03:01I mean, it's been five years now that we've been over 2 percent, and there may be different reasons for
03:06the over 2 percent.
03:07But as I say, it doesn't look to be going back to 2 percent any time soon.
03:12Yeah, the different reasons is important.
03:14I mean, it looked at the end of 2024 as if we were headed back to 2 percent.
03:21It was almost within spitting distance, and then it took off again.
03:25Why did it take off again?
03:27I think in part that was tariffs, which probably have added half a point to a percentage point to the
03:34inflation rate.
03:34And then subsequently, the Iran conflict, which has added maybe a few tenths more to core PCE, a lot more
03:43to headline inflation.
03:45And so, in some sense, things were lined up nicely.
03:49Now, the story in the 1970s was one excuse after another.
03:53Each time you had high inflation, it might have been different than the year before.
03:58So you want to be a little bit careful if you find yourself making excuse after excuse after excuse.
04:05But, you know, tariffs in Iran, they really are pretty big things, and they raise the price level.
04:12They don't permanently raise the inflation rate, or at least they shouldn't, as long as the Fed is credible.
04:18And it raises the question, I think, whether the cause of inflation can be limited to the specific cause,
04:23whether it's tariffs or whether it's Iran and energy, when you start there, can it spread into other sectors of
04:29the economy?
04:31Yeah, that's the most important question, and that's what the Fed is trying to figure out right now.
04:36And there's a few mechanisms for that.
04:38Some of it is direct, you know, just the cost of jet fuel goes up, so airplane tickets go up.
04:43That's not the biggest concern.
04:45The big concern is if it gets built into expectations, and the way that manifests itself is economy-wide wage
04:54setting and economy-wide price setting.
04:56So if you see prices go up faster, and that leads to wages going up faster, and wages going up
05:01faster leads to prices going up faster,
05:03and you end up with a sort of persistent cycle.
05:07That is so far where I am cautiously optimistic.
05:11We're not seeing the wage growth commensurate with this type of inflationary economy, again, in the way that we saw
05:18it a couple years ago.
05:19But that is where we would see the broadening out if it really starts to show up, not just in
05:25specific prices,
05:26but across the board prices, and especially in wages.
05:31Do the numbers coming out of the labor market cut both ways?
05:34There was a time not too long ago there was a lot of concern on the Fed that, in fact,
05:37there was a loosening of the labor market.
05:39We needed to really keep rates low for that reason.
05:42That does not appear to be true now.
05:44It's more stable now than it was six, nine months ago.
05:47Does that give the Fed actually some license to increase to address the inflation question?
05:53Yeah, it absolutely does.
05:54You know, the Fed has two mandates.
05:57The employment mandate right now is in better shape than I can almost ever remember.
06:02Normally, the unemployment rate is either too high and it's coming down, or, you know, maybe it's too low and
06:09it's rising quickly or something like that.
06:11It's just been amazingly stable.
06:14It peaked in November of last year.
06:16It's fallen a bit since then.
06:18It's basically the same place for the last two and a half years.
06:22And it's not clear what would dislodge that unless there was some big exogenous shock to the economy, say the
06:28AI bubble burst.
06:29And I don't think there's any reason to expect that to happen anytime soon.
06:34So, yeah, the Fed really just needs to worry about the one side of its mandate right now, which is
06:41inflation.
06:41The Fed certainly does not say it moves off of the markets, but the markets are a data point.
06:48And one thing that happened in the wake of the news conference was particularly the yield on the 30-year
06:53going up to the highest level in 19 years since before the great financial crisis.
06:57Is that some information that Kevin Walsh and the members of the Fed need to take into account?
07:01What does that tell them?
07:05What that tells them is that markets, to some degree, are expecting them to keep their word.
07:12A lot of that movement was in the real rate, not in expected inflation.
07:16It says they expect the Fed to deliver rate hikes as needed to keep inflation under control.
07:23In some ways, I saw that as a sign of credibility that the Fed would be there to deal with
07:31this problem.
07:32That being said, I'm not entirely sure of the strategy that you try to keep the markets calm by not
07:39speaking, and then you deliver some big surprises.
07:43In some sense, the meeting itself was a surprise.
07:45We didn't know.
07:46I expected them to hold, but it was much less certain than it often has been in the past.
07:52The dissents were a surprise.
07:54Some of the communication was a surprise.
07:57Some of this volatility, to me, seems unnecessary, and I hope it's a growing pain, not something that's here to
08:05stay.
08:06Well, we'll talk about that communication issue, because Chair Walsh, from the beginning, has made no secret to the fact
08:10he does not believe in a lot of forward guidance.
08:13He thought it might have been necessary when we were coming out of the great financial crisis.
08:15We don't need it anymore, and so he's moved away from that.
08:18But at what point does that really undermine some of the stability in the market?
08:23Because as you say, then you wait and you get a big surprise.
08:25Is this really giving rise to some doubt about his new policy of really cutting back on forward guidance?
08:33Yeah, forward guidance was overdone, but we don't want to go too far in the other direction.
08:40First of all, a lot of members of the committee are going to be communicating.
08:44So if you don't hear more authoritative communications, you'll end up with more noise and confusion.
08:49Every time the chair does communicate, you can end up with a bigger reaction.
08:56And then finally, I think most important, what the Fed really needs to grapple with, which is if it wants
09:02to talk less, it probably needs to act more.
09:06Chair Walsh was relying on the moves in the long end to justify not moving rates.
09:12Well, part of why the long end is moving is an expectation about what the Fed is going to do
09:17in the future.
09:18Where does that expectation come from if the Fed doesn't communicate?
09:22In a world where the Fed wants to say less, you know, maybe it's going to actually need to move
09:27rates more aggressively.
09:28And so it lets its actions speak rather than its words.
09:32And I haven't seen any willingness to do that.
09:36And it's all about that critical word you raised, which is credibility of the Fed, which is we all need.
09:41The markets need it.
09:42The economy needs credibility of the Fed.
09:44And some people today are questioning whether they've lost a bit of credibility.
09:48What is the danger here, particularly as I, as not an economist, look at this five years, over five years
09:54or two percent?
09:55And you say, oh, no, we're going to get to it.
09:57We're going to get to it.
09:58You know, if your child said that to you over five years and never did it, you'd have some doubts.
10:03The Fed is starting with an enormous amount of credibility.
10:08Now, it doesn't want to be reckless and spend that credibility willy nilly.
10:13That would be a real mistake.
10:15But, you know, to me, it's amazing.
10:17Five years of promising inflation will come down, having inflation not come down, and yet having the market expectation of
10:27inflation still be really tame is a testament to the way in which people believe in the Fed.
10:33So far, Chair Warsh has said all of the right things he may need to actually start putting his money
10:40where his mouth is if he doesn't want to start going into deficit on the credibility bank that the Fed
10:48has built up over the years.
10:49So far, let's get to it.
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